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In talking with some friends and coworkers in the financial industry, it occurred to me that many investors still have a significant ‘home country bias’, putting the vast majority of their portfolios in U.S. stocks. Seemingly, exposure was tilted towards American stocks in roughly an 80/20 split in this informal poll.
While I thought this was troubling given some of the high growth and diversification prospects that many international markets have, it doesn’t appear that this trend is exclusive to a single group by any means. According to an interesting PDF from Accuvest, most U.S. endowments with less than $50 million in assets have more than 70% of their equities in domestic stocks.
Interestingly, this home country bias is an equally big problem for foreign investors and their home markets as well. For example, according to Accuvest’s research, investors in Australia put more than 63% of their equity holdings in Australian stocks despite the fact that their nation only accounts for 2% of the MSCI World Index!
Clearly, investors across the world like to ‘buy what they know’ but is this the best strategy? After all—according to Accuvest’s report-- from the period of 2001-2010, American stocks saw yearly performance figures that put the nation in 27th place out of 38 countries that were studied, ranking far behind developing nations such as Peru and Indonesia.
Granted, the U.S. would have likely been helped if the 2011 data were included, the trend is clear; U.S. markets have underperformed relative to other nations over the past decade.
With that being said, the American market still has some great positives that merit its dominance of many portfolios. The market is huge, offers great diversity, and investor protections here are top notch compared to many emerging nations. How do you weigh this safety against the growth potential of foreign markets?
What’s the optimal mix?
Nevertheless, a nice component of international and emerging market exposure is probably necessary for most investors at this time, the real question is where to draw the line in terms of the mix between American, international-developed, and emerging market securities (read Emerging Market ETFs To Limit BRIC Exposure).
Possibly thanks to my ETF background, I have a greater focus on emerging markets and international securities than most, some even might say too much.
In fact, my IRA portfolio has a 45-45 split; 45% each to U.S. and international markets (the remaining 10% goes to fixed income). A great deal of this international exposure goes to ETFs such as those following the Malaysian (EWM - ETF report), Indonesian (IDX - ETF report), and South American (AND - ETF report) stock markets, although the international component is roughly split 50/50 among developed and emerging as well …
What about your portfolio?
How much is too much international exposure? Am I crazy for putting nearly 25% of my IRA portfolio in emerging markets or do you wish you had more in these volatile but potentially high growth securities?
Let us know in the comments below!
(see more on ETFs in the Zacks ETF Center)